Which is more important: the corporate profits of a few American companies, or the long-term economic security of the United States, national security and human rights? President-elect Biden will soon have to decide when establishing his administration’s trade policy in China.
US semiconductor and semiconductor manufacturing equipment (SME) manufacturers have benefited from strong demand from China in recent years. While this was good for their bottom line, it poses a threat to the national security of the United States. This is because China is lagging behind the United States in using those exports to acquire sensitive dual-use technology for its military. Semiconductors are the kingdom’s coin for enabling the supercomputing and artificial intelligence needed for a future military advantage.
Wall Street is betting that the Biden-Harris White House will capitulate to China and small business manufacturers. Post-election market reports exclaimed that SMEs have “seen green since the elections”, and that Lam Research, Materials applied, and KLA – the three largest manufacturers of US SMEs – are “the ultimate Biden shares“, Subject to a change in Chinese policy. As CNBC’s Jim Cramer said, these are “the ultimate Biden actions …Business is going to be very good.“
This policy change refers to obstructing the Trump administration’s plans to impose more stringent export controls. Recognizing that SMEs “can be linked to indigenous military innovation efforts in China,” the Commerce Department restricted sales Chinese companies affiliated with the Communist Party and the country’s People’s Liberation Army.
The same semiconductor technology that powers a smartphone can be used for missile guidance systems or for monitoring citizens. In the wrong hands, these dual-use technologies can be militarized against U.S. troops and reversed to expose vulnerabilities in our national security networks.
China’s chip-making capabilities lag behind that of major countries, including the United States, but it is working hard to close the gap. The Chinese government has invested 200 billion dollars in its semiconductor industry between 2014 and 2018. Its “Made in China 2025” plan commits an additional $ 120 billion and aims to reach parity with the most advanced technology by 2030 by any means necessary, including theft of technology to strengthen its production capacity.
Export controls on semiconductor equipment are a bottleneck, a limiting factor for China, which depends on foreign suppliers (namely the United States, Japan and the Netherlands, which produce more than 90% of global SMEs) for chip manufacturing technology.
The Commerce Department added more than 320 Chinese companies to the entity list, preventing US companies from selling to the named individuals. In September he imposed restrictions on China’s largest chipmaker, Semiconductor Manufacturing International Company (SMIC), citing “an unacceptable risk of diversion to military end use.”
Even so, these controls have not been sufficient – and SME manufacturers recognize this. “We still don’t see any significant impact on our business,” says Applied Materials CEO said recently. UCK CFO expressed the same feeling: “We just don’t see it having a material impact.”
These companies do not want to thwart China’s ambitions. It would be bad for their profits. China represented for 31% of Lam Research’s sales in the last fiscal year, 29% of 2019 Applied Material revenue and 25% of KLA 2019 sales. “The demand from China…must be satisfied by someoneRecently argued the CEO of Lam Research.
So what must be happening? First, the Commerce Department should put in place tighter export controls on SME manufacturers, including Lam Research, Applied Materials and KLA.
Second, the department should add more Chinese enterprises affiliated with the People’s Liberation Army to the entity list. Companies like Yangtze Memory Technologies Company and ChangXin Memory Technologies – which, like SMIC, have known ties to the Chinese military – are a good place to start.
The Trump administration appears determined to achieve these goals in its last two months. Recently, senior officials said the administration will seek to cement a series of sweeping export policies against China and install a new post to direct the effort.
Whatever progress the Trump team makes, the Biden administration should take up the torch to maintain America’s competitive advantage in the semiconductor market. The United States should not help China develop its own advanced chip manufacturing capability. To do so would compromise our national security in order to earn quick money.
James Marks, a retired major general, served more than 30 years in the United States Army, is an assistant professor at Georgetown University and a member of the Military Intelligence Hall of Fame.
Robert S. Walsh, retired lieutenant general, has completed his 35 years of service as commanding general of the US Marine Corps Combat Development Command and serves on the advisory board of the Academy Securities.
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